When confronted with evidence that the job market is red hot, naysayers often point to the employment-population ratio (E/P), which remains below pre-Covid levels: How can this be?  After all, the US total population has risen by less than 1% over the past three years.  In contrast, payroll employment is up by 2%.  Shouldn’t the employment/population ratio now be about 1% above pre-Covid levels? I found two explanations for this discrepancy.  First, the E/P ratio is calculated using the household survey of employment, which is up by only 1% over the past three years.  The household survey is widely viewed as being less accurate than the payroll survey, but I don’t have big problem with its use here.  Even a 1% rise in total employment slightly exceeds the rate of population growth.  So why is the E/P ratio lower than pre-Covid? It turns out that the E/P ratio is calculated by dividing household survey employment by not the total population, rather by the non-institutionalized population age 16 and over.  That seems reasonable, so what’s the problem? It turns out that the BLS has a very weird estimate of the over-16 non-institutionalized population.  They claim it rose by 2.5%, from 259.502 million to 265.962 million over the past three years.  In contrast, the BEA says that the total population rose by 0.9%%, from 331.345 million to 334.420 million (which is what basically what the Census Bureau says.)  By implication, the relatively small number of children and institutionalized must have plunged by 3.4 million, or nearly 5%.  That seems implausible for such a short time.  (I couldn’t find precise data, but it looks like the number of American children declined by about 1.6 million over the past three years, and the institutionalized population is quite small.) I suspect that the BLS estimates of total population over age 16 failed to account for the sharp slowdown in adult population growth due to Covid deaths and a dramatic fall in immigration.  And I also suspect that payroll employment is more accurate than the household survey.  Put the two together, and it’s reasonable to assume that employment has now exceeded the pre-Covid peak of early 2020, even accounting for population growth.  This is especially the case when one considers that the elderly population is the fastest growing part of the total US population, as baby boomers like me retire in large numbers.  There is no “hidden unemployment”. Implications: 1. We are booming; there was no recession in 2022. 2. When strong employment growth is combined with rapid nominal wage gains, there’s no evidence for the claim that the Fed adopted a tight money policy in 2022.  It didn’t happen.  At best, they adopted a slightly less expansionary policy than in late 2021.  But if a driver slows down from 120 to 110 mph, would you describing his driving policy as “slow”?  So why describe monetary policy as “tight”? 3.  Economists should not be in the business of predicting business cycles.  We’ve never been able to do it, and it just makes us look foolish.  We look like a bunch of astrologers.   (0 COMMENTS)

The vast majority of economists understand that economy-wide price controls are a bad idea. The reason is that they prevent prices from adjusting in individual markets. Supplies and demands for various goods change a lot, and avoiding price controls allows prices to adjust to those changes in supplies and demands. We saw a huge problem with President Nixon’s price controls in 1973, when the prices his controllers had set for oil and gasoline were based on a world price of oil of about $3 per barrel. In the fall of 1973, when a suddenly powerful OPEC raised the world price of oil to about $11 dollars per barrel, there was a shortage of oil and gasoline. People who drove vehicles during that time probably remember their frustrating time in line, sometimes to buy less than a full tank of gasoline. Price controls don’t work, period. You might think that’s the end of the story. Unfortunately, it’s not. Economists occasionally give sophisticated justifications for policies that are bound to fail. Because price controls are so destructive, it’s important to say what’s wrong with economic thinking that lays the groundwork for such controls. It’s also important to say, yet again and if only briefly, what’s wrong with wage and price controls. This is from David R. Henderson, “Saying No (Again) to Wage and Price Controls,” Defining Ideas, February 2, 2023. In it I criticize Paul Krugman for coming very close to advocating them and Olivier Blanchard for laying some of the groundwork. I also criticize Blanchard for getting causation on lower inflation and slower growth wrong. I write: If you get the causation wrong, you can be led to some bad policies. If you think, for example, that slowing growth will reduce inflation, you might be tempted to advocate higher tax rates or more regulation, both of which would slow growth but would do nothing to reduce inflation. To drive the point home, I used a joke, but my editor said that it didn’t clearly apply. So he deleted it. If it didn’t work for him, it didn’t work. But see what you think. Here’s the joke: I’m reminded of the old joke about the guy who calls 911 because he discovers his wife on the floor, having bled from a bullet wound. The 911 operator asks if she’s dead. He answers, “I think so.” “Well, make sure,” says the operator. “Ok,” says the husband. A few seconds later, the operator hears a gun fire twice. “Ok,” says the husband, “she’s dead.”     (0 COMMENTS)

Finding mistakes in the media is like shooting ducks in a barrel. But I hope today’s post will do more than take a few potshots, I am going to try to illustrate some fundamental problems with macroeconomics.The Economist has an interesting article discussing the inflation that hit Europe in the period around 1500-165o.  They point out that currency debasement does not provide an adequate explanation: Spain stopped debasing entirely from 1497 to 1686. Some historians, therefore, follow Bodin and say that demand-side explanations by themselves are insufficient. They also look at what was happening across the Atlantic, the source of a huge supply shock to Europe’s economy. In about 1545 people discovered vast silver deposits in Bolivia. Potosí, the centre of this lucrative new industry, became perhaps the fifth-largest city in the Christian world by population (after London, Naples, Paris and Venice). In the first quarter of the 1500s just ten tonnes of silver had arrived on Europe’s shores. By the third quarter of the century Europe imported 173 tonnes. Spain, where much of the metal arrived, initially experienced especially high inflation—but it then spread across the rest of Europe, as far as Russia. This left me scratching my head.  The first paragraph suggests that demand side explanations are not adequate, and that we need to consider supply shocks.  But the second paragraph discusses a demand shock, the huge increase in silver production out of Potosi.  In those days silver was money, so the second paragraph is essentially describing a big increase in the money supply.  Why does The Economist describe it as a supply shock?  The supply of money impacts aggregate demand, not aggregate supply. Eventually, the great inflation came to an end. Population growth slowed, reducing demand for goods and services. I had to frequently correct my students on this point.  Slower population growth reduces aggregate supply, not aggregate demand.  This would actually increase inflation.  The Black Death was inflationary because it killed people but didn’t kill silver coins.  It was a negative supply shock.  Population growth does not boost aggregate demand, at least in the long run (which is what is being considered here.)  Rapid population growth in the US during the late 1800s caused deflation, as output rose faster than the money supply (which was pegged to gold at the time.) I suspect that most people (and even some economists) have an idea in the back of their minds that AS/AD is sort of like supply and demand.  Not so, the two models are completely unrelated.  More supply of money means more demand for goods.  For any given money supply, more people means more aggregate supply, with little or no change in aggregate demand. Wouldn’t there be more people out shopping if the population increased?  Yes, but each person would possess fewer silver coins.  Thus the total amount of nominal spending (aggregate demand) does not increase when the population rises.  If you prefer, an increase in Y reduces P, holding M*V constant: M*V = P*Y Any intuition you have for ordinary S&D simply does not carry over to aggregate supply and demand.   PS.  The Economist article is actually very good, despite my quibbles, and well worth reading. (1 COMMENTS)

Financial Times columnist Ranar Foroohar criticizes the “shadow work” that used to be done by hired third parties but that greedy companies (as we are led to understand) have now pushed onto the consumers themselves (“The Real Cost of Shadow Work,” January 30, 2022). Examples include banking and travel booking, most of which is now done online. She quotes a former editor of Harvard magazine: “I’m just amazed how we’ve been suckered into spending our own time straightening out things that other people used to do for us.” Herself a victim, Ms. Foroohar asks: Does it make sense for me, as a well-paid knowledge worker, to spend several hours a week struggling with tasks that used to be done far better by entry-level workers who needed the employment? The basic answer is that she could hire a secretary or a computer geek to help her, if her time doing is really worth more than her assistant would cost. Since the Industrial Revolution, we should understand that a growing economy means more productive workers and thus higher wages. This explains why full-time domestic personnel has become so expensive and that only the very rich can afford it. Executive assistants, even at the entry level and even those who “need” the job, are expensive. Foroohar writes: One could argue that all of this shadow work drives consumer prices lower, by reducing human labour. Perhaps. But is it productive for the economy as a whole? Here again, I suggest that economic reasoning would be useful. “Shadow work” has developed in areas where most consumers find it cheaper to do it themselves than to hire somebody on the market. Think about IKEA furniture. Do-it-yourself is encouraged by high marginal income tax rates. And there is no “economy as a whole”: each individual makes the choices he (or she) thinks are best according to his own preferences. If one wants to stick with the misleading expression “economy as a whole,” one should understand that it only represents the configuration of all individual choices and their consequences. In short, there is nothing over and above that except elitist thinkers and government coercion. It won’t do to invoke the “negative externality of a market system in which companies are incentivised to offload labour costs” and to drop Joseph Stiglitz’s name. What about the negative externalities of government planning, economic ignorance, or virtue-signaling do-goodism? The Financial Times columnist is drowning in the zeitgeist of our time when she suggests that government intervention is (of course) the solution: Unless states improve education to keep pace with technology, many of these workers [displaced by technology] can’t get new jobs, and productivity and growth decline. What should the state have done to prevent domestic workers from being replaced by domestic appliances? Didn’t they needed the jobs? One may share some of the columnist’s frustrations with the customer service of some companies—many of which actually being among the most government regulated. Banks and airlines are good examples. Some of her readers may even discover business opportunities where a fortune could be made offering better service to consumers—provided the latter are willing to pay the additional cost and that the entrepreneur is willing to face government bureaucrats. It is true that we live in an epoch or rapid technological and economic change, and that many people feel lost, even not counting mounting government surveillance and interventions. It looks like the times when trains or cars started roaming the land, when the telegraph and telephone spread, or when the political fad of eugenics gripped American governments. I would argue that these are no reason for advocating public policy to assist computer-challenged individuals. In a very mixed economy, it is often difficult to know if the main cause of a problem lies in government meddling or in imperfect markets in an imperfect word. Or is it possible that Atlas is tempted to shrug? At any rate, private failings have one big advantage over the government sorts: in the former case, you are not literally forced to patronize your tormentors. (1 COMMENTS)

The average value of welfare benefits per immigrant was $6,063 in 2020, or 27.3 percent less than the $8,335 average for native‐​born Americans. Figure 1 breaks down the numbers by type of welfare program. Immigrants consumed 36.9 percent less Social Security, 26 percent less Medicare, 10.7 percent less Medicaid, 11.5 percent less SNAP benefits, and 87.6 percent less TANF benefits than native‐​born Americans on a per capita basis. However, immigrants consumed 11.4 percent more in SSI benefits than natives, which translates to $19 more than natives on a per capita basis. Immigrants individually also consumed 42.9 percent more WIC benefits than native‐​born Americans, which translates to $7 more than natives per capita. This is from Alex Nowrasteh, “Immigrants Use Less Welfare Than Native-Born Americans,” Cato at Liberty, February 1, 2023. It’s based on this longer study: Alex Nowrasteh and Michael Howard, “Immigrant and Native Consumption of Means-Tested Welfare and Entitlement Benefits in 2020,” Briefing Paper No. 148, January 31, 2023. Nowrasteh is aware that 2020 was an unusual year because of the huge (hopefully temporary) expansion of the welfare state by a bipartisan Congress and and President Trump. One thing these numbers reflect is that the biggest programs in the welfare state are Social Security and Medicare. A lot of immigrants have not been here long enough and/or have not earned high enough income (and paid the related FICA taxes) that they qualify for high Social Security payments. But Nowrasteh is aware of that and strips out Social Security and Medicare. He writes: Immigrants still consumed less than natives when the entitlement programs of Social Security and Medicare are excluded from the analysis. The average immigrant consumed $2,273 in means‐​tested welfare benefits in 2020, about $310 less than the average American who consumed $2,583. That’s a difference of 12 percent. As you can see, that narrows the difference substantially. So an immediate question to ask is whether immigrants pay their own way. Do they, as a whole, pay enough in taxes to make up for the welfare expenditures on them? Nowrasteh is aware that he hasn’t answered that question, writing: Evaluating the net‐​fiscal effects of immigration – whether the taxes paid due to them being here is greater than their consumption of benefits – requires more complicated calculations and estimates. Stay tuned for those. Whereas some advocates of allowing much more immigration have no problem with the welfare state, Nowrasteh isn’t in that category. He writes: Elderly immigrants consume more Medicaid benefits than elderly native‐​born Americans, but natives are more expensive than immigrants in the same age groups on a per capita basis for all other large programs and most smaller ones. Immigrants are already legally restricted from accessing most welfare programs for some years after their arrival, but minor legal changes along the lines we suggest here would significantly reduce immigrant access to all these programs. Rep. Grothman (R‑WI) has introduced multiple bills to end welfare access to non‐​citizens, which is second best to massively scaling back welfare for all. Note also his discussion of how immigration to Israel increased the welfare state in the short run and reduced it in the long run. Disclosure: I’m an immigrant who had a fairly bad experience on my first try at getting a green card. That probably biases me. (0 COMMENTS)

Karl Marx claimed that, to realize their profits, capitalists must exploit workers. However, by his definition of the word, every society – capitalist or not – depends upon exploitation. According to Marx, workers are exploited when they do not keep or control all the value created by their own labor. The problem is that, if a laborer received the full value of his product, why would anyone buy it? The only reason for buying something is for the value it provides, but if the price is so high that customers receive no net gain from its purchase, no purchase will take place. If no one buys anything, laborers will be left with products that they can neither use nor sell, and production will be of no benefit to anyone. Clearly, no society can survive under such conditions. Marx tried to deal with this and other problems inherent in the Labor Theory of Value (LTV) by theorizing two different values: Use value: The benefits – as subjectively determined by a product’s user – realized by utilizing the product. Exchange value:  The amount of socially necessary labor that can be obtained by exchanging a product (or service) or for another product, where “socially necessary labor” is the average amount of time that the average laborer takes to produce a given socially useful product. Exchange value is objectively determined by the amount of socially necessary labor contained in a product. Using these different definitions of value, Marx could argue that the laborer could receive the full exchange value of his product while still leaving surplus use value for the purchaser. But his theory of an exchange value that can be objectively determined implies that nearly any exchange must result in exploitation. In the exchange of any two goods, X and Y, there are only three possibilities: X and Y contain the same amount of socially necessary labor and, therefore, have the same exchange values. X contains more socially necessary labor than Y. Y contains more socially necessary labor than X. In cases 2 and 3, no exchange will occur because no one will offer a good in exchange for one of lesser value. But neither would an exchange occur in case 1. Who would pay the transaction costs of taking goods to market to exchange them for goods that are of no more value? If exchange offers no gain, there is no point in making an exchange. Marx, perhaps recognizing that exchange must, according to his theories, entail exploitation, proposed a society in which exchange is prohibited. In Marx’s utopia, factories would produce for use rather than for exchange. In practice, finished goods would be sent to warehouses from which they would be distributed to consumers. Workers would, in Marx’s formulation, produce according to their abilities and receive according to their needs. In practice, however, workers are far more likely to produce according to a quota set by central planners and receive according to the planners’ assessment of their needs. Even assuming an ideal distribution of goods, though, the only way in which a worker can receive the full exchange value of his production is in the unlikely event that his needs exactly match his abilities. Most workers will either produce more than they receive or receive more than they produce. The former are exploited according to Marx’s own definition of the word. Moreover, if the society is to survive, most workers will have to produce more than they consume and, therefore, most must be exploited. On the other hand, if exchange is prohibited, then the exchange value of any good or service is, legally, zero. Therefore, by definition, anything that a worker receives exceeds the exchange value of that which he produces. Problem solved – at least to the satisfaction of a Marxist theoretician. One wonders whether such verbal legerdemain will satisfy a laborer equally well.   Richard Fulmer worked as a mechanical engineer and a systems analyst in industry. He is now retired and does free-lance writing. He has published some fifty articles and book reviews in free market magazines and blogs. With Robert L. Bradley Jr., Richard wrote the book, Energy: The Master Resource. (0 COMMENTS)

Suppose technocracy has all the systemic problems Jeffrey Friedman suggests in Power Without Freedom. Does he think this is nonetheless the best option available? Or might there be an alternative worth trying? Friedman thinks there is a better way. Referencing the work of Albert Hirschman in Exit, Voice, and Loyalty, Friedman believes the best (though still flawed) means for solving social problems is found through capitalism and exit through the private sphere, and dubs his alternative system an exitocracy. An exitocracy is a system where social problems are solved not by targeted policy interventions, but by a general policy focused on maximizing the opportunity for exit – that is, for people to be able to leave their current situation in search of a better one within the private sphere. He notes that some might argue an exitocracy is more a form of meta-technocracy than an alternative to technocracy. Rather than engaging in definitional disputes, he argues that if one dubs an exitocracy a technocracy, one should realize how it fundamentally differs from existing technocracy: An exitocratic government would unquestionably be a state. But it would differ from a technocratic state – judicious or injudicious – in that, instead of attempting, case by case, to produce solutions to any and all social problems that might arise, its cardinal goal would be to provide a framework within which individuals could attempt to solve – or better, escape – the problems that afflict them as individuals, whatever their origin (society-wide or not). Where this is possible, such a state would allow exit to trump technocratic voice. What would remain of technocracy would be the attempt to provide public goods, including those that are foundational to a private sphere in which individuals using exit can flourish. In considering how to judge technocracy against exitocracy, we would need to “ask if actions in the private sphere would tend to be epistemically superior in achieve the [goals] of technocracy in comparison to the voice-based public-sphere problem solving on which ordinary technocracies rely. If the answer is yes, then we can judge ordinary technocracy, judicious and injudicious alike, as illegitimate according to its own standards.” What would make exitocracy epistemically superior to technocracy? Friedman argues that the epistemic burdens of a functioning exitocracy are much lower and much more reliably achieved than those facing a technocracy: To use exit reasonably well, in comparison to the use of voice, the decision-maker (such as the consumer or worker in an exitocracy) considers only the effects of the various options she is able to experience. In using voice, however, the technocratic decision-maker must reach far beyond experiential knowledge so as to judge the significance of social problems for anonymous others, to speculate about their causes, and to speculate about the efficacy of various solutions and the side effects they may cause…the relatively reliable knowledge of customers and workers can be put to use, but without expecting them or any other identifiable agents to have reliable society-wide knowledge. Inasmuch as it is inherently difficult for anyone to have such knowledge – even to those who are judiciously attentive to ideational heterogeneity – the exitocratic alternative would appear to be the better one. Private sphere exit options in a capitalistic system have built-in systemic advantages over technocratic solutions, despite the fact that agents within both systems have the same cognitive limitations: The epistemic advantage of economic competition is not that any identifiable capitalist is less fallible than any other, or that capitalists, as a group, are less fallible than technocrats, as a group, but that capitalism allows more than one fallible solution to be tried concurrently, with those affected by the problem using personal experience to judge which of the competing solutions is relatively acceptable…The essential requirement, then, is that there be a diversity in the options available to consumers, based on diversity in various competitors’ fallible ideas about what consumers need and are willing to pay for. The same applies to diversity in the options available to workers, based on diversity in various fallible employers’ ideas about what workers need and the work conditions they are willing to tolerate. This system would also dissolve the difficulties of epistocratic identification described in the fourth part of this series: This qualitatively changes the situation that leads to the problem of epistocratic identification. In an exitocracy, competitors offer solutions to the people’s problems, and the people evaluate these solutions – not, however, by trying to adjudicate among the competitors’ theories about, or interpretations of evidence about, the society wide efficacy of various solutions; nor by trying to outguess or out-research the competitors so as to come up with solutions of their own; nor by relying on heuristics such as the competitors’ educational pedigrees; nor by trusting in the competitors’ dedication to the common good or their strength of will. Instead, they directly try out the competing solutions that the competitors create. In the ideal type, consumers or workers need know nothing about the attitudes, the character, or even the identity of those who sell them things or pay their wages. They need only know whether the results for them personally are better than the alternatives they have tried. While ideational heterogeneity presents substantial difficulty for an effective technocracy, it actually enhances the effectiveness of an exitocracy: In this analysis, the very thing that renders the problem-solving activities of an ordinary technocracy relatively unreliable – ideational heterogeneity – enables relatively reliable (although by no means perfect) problem-solving in an exitocracy, ceteris paribus, because in an exitocracy ideational heterogeneity among producers and employers allows them to offer competing solutions. However, this does not mean Friedman is all-in on libertarian style free market capitalism. In order for exitocracy to effective, Friedman says, it must be accompanied by a program of income redistribution. Friedman says the redistribution would be “far more ambitions than a universal basic income” and would take the form of “redistribution along the lines of Rawls’s Difference Principle”, although the “rationale for exitocratic redistribution” is “not the achievement of social justice” of the sort Rawls envisioned. Instead, Friedman argues that “Exit opportunities will often require economic resources. These can allow one to enter into alternatives to the situation from which one would like to exit. Thus, if the experimentation promised by the exit option is to be possible for more than the rich, economic redistribution is called for.” And this wraps up Friedman’s critique of technocracy and his idea for a better alternative. Rather than using a technocracy, which gives power to those without knowledge, Friedman advocates for exitocracy combined with income redistribution, in order to ensure those with knowledge have the power to improve their own circumstances as they see fit. I’ll spend the subsequent posts describing what I see as the strengths and weaknesses of Friedman’s case.   Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.    (0 COMMENTS)

In general, policies that bring down inflation tend to impose pain on the labor market. That was certainly the case back in the early 1980s, when Paul Volcker’s anti-inflation policy reduced inflation from over 10% to 4%, while pushing unemployment up to a peak of 10.8% in late 1982.Larry Summers has argued that the current anti-inflation program, while necessary, will also impose substantial pain on the labor markets. This claim seems reasonable, but needs a few qualifiers:1.  The labor market is much tighter than in the early 1980s.  One obvious indicator is unemployment, which current stands at 3.5%.  Back before the 1981-82 recession, the unemployment rate was about 7.5%.  That’s partly because the so-called natural rate of unemployment back then was higher than today, but that’s not the only reason.  There really is a much greater worker shortage today than back in early 1981. 2. Nominal wage growth today has far less momentum than back in the early 1980s.  Today brought further good news on the wage front: The employment cost index, a barometer the Federal Reserve watches closely for inflation signs, increased 1% in the October-to-December period, the Labor Department reported Tuesday. That was a bit below the 1.1% Dow Jones estimate and less the 1.2% reading in the third quarter. It also was the lowest quarterly gain in a year. That figure (4% annualized) is consistent with roughly 3% trend inflation.  In contrast, nominal wage growth in the early 1980s was extremely rapid—peaking at roughly 9%.  The Fed faced a far greater challenge in the early 1980s than today.  They need to do much less wage disinflation, and they start from a stronger labor market. You might wonder how wage and price inflation back in the early 1980s could have been so much worse, while the today the labor market is far more overheated.  Isn’t high inflation caused by excessive real economic growth, as in the Phillips Curve model? In fact, the Keynesian Phillips curve model is simply wrong.  It’s not wrong because there is no relationship between inflation and unemployment.  A sharp fall in both wage and price inflation tends to be associated with a temporary rise in unemployment.  Rather the Phillips Curve model is wrong because Keynesians get causality reversed.  They assume that causation goes from economic overheating to wage and price inflation, whereas the opposite is more nearly true.  To be precise, it is unexpected increases in nominal growth in spending that cause both rising inflation and falling unemployment. Milton Friedman had the correct interpretation of the Phillips Curve.  He saw that the high inflation of the early 1980s was not caused by an overheating economy; it was caused by monetary policy.  Rapid money growth drove NGDP and wage and price inflation much higher.  Because wages and some prices are sticky in the short run, not all of them immediately adjust upward to their new equilibrium.  Thus you also get a temporary period of falling unemployment when monetary policy boosts nominal spending.  Unexpectedly high (demand side) inflation reduces unemployment for a few years. Once the public adjusts its expectations to the high trend inflation, the economy returns to the natural rate.  This explains why the economy today is more overheated than before the Volcker disinflation.  By the early 1980s, the public had adjusted to a long period of high inflation and unemployment had returned close to its natural rate.  Each year, both wages and prices rose rapidly—but the economy was not in “disequilibrium”.  In contrast, today’s economy has still not adjusted to the very fast NGDP growth of 2022.  Thus the labor market is more overheated than in early 1981, despite much less inflation.  The labor market is in disequilibrium. Today’s wage report is good news, as it suggests that Powell doesn’t need to do nearly as much nominal wage disinflation as Volcker had to do.  He needs to get that wage index down from 4% annual growth to 3%.  Fortunately, today’s workers are not used to getting 9% raises every year, and probably view the big wage increases of last summer as unusual.  I still believe that some pain will be imposed on the labor market in bringing inflation down, but perhaps something closer to 4% or 5% unemployment, not the double-digit unemployment of late 1982.  It may not be a soft landing, but relative to 1982 it will probably be a softish landing.  PS.  After writing this post, I noticed that Joey Politano has a similar take:       (0 COMMENTS)

Thinking on the margin about the Holocaust. January 27 was International Holocaust Remembrance Day. I got thinking about it and remembered a back and forth I had had a few years ago with a Jewish friend. I had said that if Hitler had not had gun control, a lot of Jews would have been able to defend themselves. He argued that Hitler’s enforcers had so much power that a few hundred thousand Jews having guns wouldn’t have made much difference. I agreed that we still would have had the Holocaust but that it would have been slightly less bad. A few extra thousand lives, or maybe more, might have been saved. To him that wasn’t so important. Since then he has died and so I can’t make this point to him, but I can make it to you. And I’ll make it with the following rhetorical question: Was Oskar Schindler unimportant? My guess is that you have seen or know of the movie Schindler’s List. This is the 30th anniversary of the movie, by the way. In it we see businessman Oskar Schindler hiring Jews to make pots and pans so he can make money. And then he discovers that he cares about them. Imagine that! An employer caring about employees? What will they think of next? Because he cares about them, he creates a scheme to save as many of their lives as possible. He ends up saving over 1,300 Jews. In my view, that’s important. What’s your view? (0 COMMENTS)

Almost all economists believe that a policy change that encourages the building of more housing will tend to reduce housing prices.  That’s what the laws of supply and demand seem to predict.  There are empirical studies supporting this claim.  And yet, according to Bloomberg many people do not seem to accept the obvious: In a working paper released in November, three scholars from three different University of California campuses reported public-opinion-survey results showing that “about 30%-40% of Americans believe, contrary to basic economic theory and robust empirical evidence, that a large, exogenous increase in their region’s housing stock would cause rents and home prices to rise.” (Italics theirs.) A similar percentage believed that such an increase would cause rents and prices to fall, with the balance predicting no change. Another study by political scientists Clayton Nall of UC Santa Barbara and Stan Oklobdzija of UC Riverside and law professor Chris Elmendorf of UC Davis found that this skepticism does not carry over to other commodities: We show that the public understands the implications of supply and demand in markets for agricultural commodities, for labor, and even for cars, a durable consumer good that, like housing, trades in new and second-hand markets. The confusion may be due to endogeniety—builders prefer to build new units in booming areas where prices are rising.  But it is theoretically possible that new construction might actually cause housing prices to rise.  For instance, suppose new construction made a formerly run down neighborhood more attractive.  In that case, it might create such strong positive externalities that the price of existing homes in the area actually rose, despite the increase in supply.  In other words, it might boost demand by more than it boosted supply. In practice, this sort of spillover argument is unlikely to apply over any significant geographical range.  But what if it were true?  What would be the policy implications? Standard economic theory suggests that if an activity produces positive externalities, then the argument for encouraging that activity becomes stronger, not weaker.  Thus if building new housing causes housing prices to fall, that’s great news.  The free market is at work providing more homes for more people.  And if building new housing causes housing prices to rise, that’s really, really good news.  The free market is at work providing more homes for more people, and the quality of nearby neighborhoods is also rising due to positive externalities. Ironically, in the debate over housing construction, rising prices are widely seen as a sign that the policy causing a supply increase has not been successful, that it has failed to achieve its goal.  In fact, economic theory suggests just the opposite.  If new construction causes rising prices as a spillover effect then the benefits are so strong that governments might want to actually subsidize new construction. Why are people confused on this point?  Because they focus on prices, whereas they should be focused on the quantity and quality of housing.  More quantity means higher living standards, and more quantity plus more quality means much higher living standards, regardless of what happens to prices. It’s analogous to the way that almost everyone misunderstands taxes.  People focus on who writes a check to the federal government, not how a person’s flow of consumption is altered by the tax system.  If taxes are not reducing your consumption, now or in the future, then you aren’t paying any taxes.  (Perhaps your children or grandchildren are paying the tax, or it’s paid by the workers in the business you don’t create because your capital was confiscated by the government.  Or those who would have received your charity.) Economics is not about money, it’s about how resources are allocated.  Don’t follow the money—follow the goods and services. PS.  I did a recent post discussing the construction of new residential skyscrapers in Austin.  This tweet caught my eye:   (0 COMMENTS)